What would be the trading equation to round off the edges of market volatility...like the surface of a pond calming. Something that can be implemented on all time scales.Like a market auto-correct function.Perhaps something that targets and calculates relative slopes.

Maybe we should start with a simple projection of what the Bitcoin value SHOULD be. So if you're a log chartist, you fit a log line over the trade price. When above this value, you sell. When below this value, you buy. This would be completely ignoring momentum.

I created a market making system, and launched it about a week ago on the MtGox API. Although, lately there really hasn't been a lot of volatility in the MtGox/USD. I'm limited by the comission structure in how tight I can make markets. For example, if I have to pay .6% per trade, I need to make over 1.2% per round trip. The other bitcoin exchanges don't have as much volume, so I don't know if it is worth it.

I really like this idea…if a well known algorithm and tools to deploy it could be made open source, then people could apply some amount of funds to it. Hundreds or even thousands of people putting a few hundred or thousand dollars each toward the task could earn them a small return while helping to stabilize the price of a bitcoin.

A lot at first. Once it's known this is happening, traders will keep it in the bands by choice so as not to hand profits away. Or, if the strategy is too rigid, they will manipulate it (rally along the threshold, having it sell all the way up).